Plan for new Bolivian oil tax makes investors uneasy

Mar 04, 2004 01:00 AM

US and European oil investments in Bolivia hang in the balance as President Carlos Mesa prepares to ask Congress to
approve a law that aims to mitigate the demands for nationalization of the petroleum fields conceded to the
transnationals by former president Gonzalo Sanchez de Lozada.
Government officials debate amidst quiet pressures from the foreign petroleum companies, and continue revising their
draft of the Fossil Fuels Law, which they had promised to send to Congress. The bill includes a "complementary fossil
fuel tax" (ICH) with sights on obtaining as much as a 32 % contribution from the country's oil production.

This tax, added to other fiscal obligations (royalties on exports) of 18 %, would push up to 50 % the total that the
national coffers would receive of the income generated by the exploitation of Bolivian petroleum and natural
gas.
"The change in tax policy for the oil companies is a fait accompli" and forces a waiting period for their
investments, former energy minister Carlos Miranda, who served under the Sanchez de Lozada government (2002-2003),
told.

The decline in oil investment from $ 680 mm in 1998 to 40 mm in 2003 reflects the collapse of the national energy
industry, Carlos Alberto Lopez, an energy consultant and former deputy minister, told.
"From 1996 to 2003, Bolivia took in around $ 3.6 bn in foreign direct investment earmarked for developing its
petroleum fields, particularly for natural gas, while the national annual budget for health, education and other
public services has been approximately $ 500 mm in this impoverished country of 8.7 mm people."

But Lopez argues that the amount invested in the energy sector is insufficient. He reckons some $ 4.4 bn is needed to
complete the preparation of the fields that hold an estimated 54 tcf of natural gas, the second largest reserves in
South America, after Venezuela.
Last October, massive mobilization of peasant and labour organizations, led by protests in the western Bolivian city
of El Alto, intensified their demands for changes in the country's energy policy. The widespread unrest, which
entailed roadblocks on major roads, lasted several weeks and paralysed economic activity and cut off supplies. The
protesters were against the export of Bolivian natural gas to North America, under a concession to the LNG Pacific
consortium, via a pipeline that would be built to connect Bolivia to Chilean ports on the Atlantic.

Chile is an historic rival of Bolivia, since the 1879 War of the Pacific, in which Bolivia lost its outlet to the sea
-- an issue that still weighs heavily on bilateral relations. The pipeline project forecast revenues of more than a
billion dollars a year for the consortium, which comprises the transnationals British Gas, Repsol-YPF of Spain, and
the US-based Pan American Energy.
Meanwhile, through taxes and royalties, the Bolivian state would receive just $ 70 mm to $ 80 mm a year, according to
the original calculations. But the protests went beyond the pipeline issue. They also took aim at the government's
economic policy and called for a constitutional reform that would take into account demands for autonomy and would
expand citizens' rights in the electoral arena and create channels for direct democracy, such as referendums.

The weeks of protest and crackdown claimed more than 70 lives, according to human rights groups. Increasingly
isolated, Sanchez de Lozada saw himself forced to resign, and fled to the United States. The groups involved in the
nationwide unrest supported the constitutional succession of then-vice-president Mesa, on the condition that he would
carry out the changes they demanded.
But today, those movements have withdrawn their support for Mesa. The secretary-general of the trade union Central
Obrera Regional of El Alto, Roberto de la Cruz, reminds the government of the demand to "nationalise" the oil fields
and to rebuild the practically defunct state petroleum enterprise Yacimientos Petroliferos Fiscales Bolivianos.
"The people of El Alto are not aware of the content of the draft of the new Fossil Fuels Law, and therefore the
decision to approve would be authoritarian and unilateral," De la Cruz told.

On another front, Mesa's difficult balance between social pressures and strategic efforts to develop Bolivia's
natural gas potential has come under fire from former deputy energy minister Lopez.
"There is political urgency that the government respond to the demagogical slogans," he said. The new proposals would
mean Bolivia would impose taxes 10 % higher than those in Brazil and 12 % more than Argentina's, said Lopez.

Alvaro Rios, minister of fossil fuels, calculates that the proposed ICH tax would bring in $ 50 mm a year. The public
sector deficit, meanwhile, is estimated at $ 700 mm. The National Electoral Court announced that the promised
referendum on the natural gas export plan could take place in early June. The tribunal's president, Oscar
Hassentaufel, said that Congress must first approve the referendum law.
The creation of the referendum mechanism was one of the commitments Mesa made in the wake of the unrest of last
October. After the crisis and the ouster of Sanchez de Lozada, the Pacific LNG project was left pending.